Investment Approach

Responsible Investing

Central to my investment belief is the view that sustainable companies will be able to generate positive free cash flow from operations over the longer term. Good governance practices provide the framework for this through the provision of appropriate strategic direction and policy setting. In addition, it is the effective allocation of free cash flow over time that drives long-term value creation for shareholders. To be successful, capital allocation requires astute management and oversight by Boards.

We welcome more recent enhancements to transparency and reporting on Environmental and Social considerations. There is substantial evidence that considering ESG factors in research processes enhance the prospects of achieving attractive risk-adjusted performance over the long term.

— William Priest, Executive Chairman and co-CIO

Epoch has a long tradition of investing with the purpose of providing solutions for our clients. In recent years we noted that many were beginning to explore incorporating ESG considerations into their investment policies. Hence, to further help our clients, Epoch has allocated resources to improve the formal incorporation of E, S & G considerations into our investing processes. In addition, signing the PRI is clear evidence of Epoch’s commitment to responsible investing.

— Philipp Hensler, Chief Executive Officer

Sustainable Investing Report 2019

The inaugural edition of Epoch’s annual Sustainable Investing Report. This report highlights several of the activities Epoch undertook in 2019 and point to some of the priorities we have established for 2020.

View Report

Dedicated ESG team

Epoch has two investment professionals solely dedicated to the ongoing implementation of Epoch’s ESG program.
Richard Watt
Bio

Ravi Varghese
Bio

Epoch’s ESG Policy

Epoch made a strategic commitment to ESG with the adoption of its first formal Policy in 2015. Following extensive research, Epoch is now pleased to formally launch a revised and updated ESG Policy. As noted in our Annual Report, while our focus historically has been on understanding governance frameworks to guide the operation of a business, throughout 2019 we also evaluated other issues within the umbrella of ESG considerations. In particular, Epoch considers climate change an increasingly important ESG factor and has adopted the CDP Global Investor Statement on Climate Change at the core of the revised policy. Our objective is to review and monitor the carbon intensity of our portfolios, focus on the major contributors, and engage with those companies to better understand their business strategy and what actions are being taken to address climate related risks. We have also made a number of other changes to our policy and we plan to develop other considerations to help broaden our understanding of both potential risks and opportunities for the companies we invest in.

Link to ESG Policy

Participation in Strategic Initiatives

Epoch is a signatory of the UN Principles for Responsible Investing. We are evaluating a number of initiatives including partnerships with academia, Non-Governmental Organizations (NGOs) and other associations relevant to the enhancement of our ESG processes and clients’ objectives.

United Nations Principles for Responsible Investment (UN PRI)

Industry Associations

Epoch continues to examine the merits of joining various associations to benefit our investment processes and ESG program. These organizations provide valuable education and opportunities to collaborate. To date, Epoch has become a member of CDP and Ceres.

CDP

“CDP (formerly the Carbon Disclosure Project) is a not-for-profit charity that runs the global disclosure system for investors, companies, cities, states and regions to manage their environmental impacts. Over the past 15 years CDP has created a system that has resulted in unparalleled engagement on environmental issues worldwide.”
Link to CDP website

Ceres

“Ceres is a sustainability nonprofit organization working with the most influential investors and companies to build leadership and drive solutions throughout the economy. Through powerful networks and advocacy, Ceres tackles the world’s biggest sustainability challenges, including climate change, water scarcity and pollution, and inequitable workplaces.”
Link to Ceres website

Resources

Our Perspectives

There have been two monumental crises in the past two decades, the Global Financial Crisis and the current COVID-19 pandemic. While the COVID-19 crisis is crippling financial markets in a similar fashion, monetary policy in the form of QE will not be the silver bullet we need. The solution to the current crisis will require prudent fiscal policy to see us through.
March 16, 2020

Comparing Two Market Crises: A New Type of Crisis Requires a New Solution

There have been two monumental crises in the past two decades, the Global Financial Crisis and the current COVID-19 pandemic. While the COVID-19 crisis is crippling financial markets in a similar fashion, monetary policy in the form of QE will not be the silver bullet we need. The solution to the current crisis will require prudent fiscal policy to see us through.

The dispute between the U.S. and China is clearly not just about trade, or even technology. At stake are the values that will determine the architecture and governance of the global world order.
December 2, 2019

Cold War 2.0: The Platform, the Players, and the Stakes

The dispute between the U.S. and China is clearly not just about trade, or even technology. At stake are the values that will determine the architecture and governance of the global world order.

The current hype about two-sided digital platforms, blitzscaling and winner-takes-most markets has fueled a surge in IPO listings and produced stratospheric valuations that are difficult to reconcile with free-cash-flow (FCF) fundamentals. The big question is, are we repeating the excesses of the dot-com boom? In this paper, we look at the reasoning used by those who think history is repeating itself including IPO supply, profitability and VC funding. We also look at the weaknesses in those arguments and why some believe that the current situation is different from the dot com bubble, such as median age of tech IPOs and sales growth. Finally, we explore how investors can look at these companies through a free cash flow lens.
June 19, 2019

Blitzscale and Hope: Unicorns, IPOs and the Fear of Repeating the Late 1990s

The current hype about two-sided digital platforms, blitzscaling and winner-takes-most markets has fueled a surge in IPO listings and produced stratospheric valuations that are difficult to reconcile with free-cash-flow (FCF) fundamentals. The big question is, are we repeating the excesses of the dot-com boom? In this paper, we look at the reasoning used by those who think history is repeating itself including IPO supply, profitability and VC funding. We also look at the weaknesses in those arguments and why some believe that the current situation is different from the dot com bubble, such as median age of tech IPOs and sales growth. Finally, we explore how investors can look at these companies through a free cash flow lens.

Does a stock’s price and its P/E ratio tell you how much a company is worth? Conventional wisdom says yes, but we think otherwise. In this paper we explore:

  • The theory behind the discounted cash flow (DCF) valuation model and the underappreciated role that ROIC plays in the model
  • The P/E ratio and find that it does not tell us what most people think it does, nor does its offshoot, the P/E to growth (PEG) ratio
  • How we can use what we have learned about the DCF model to deconstruct P/E ratios in the real world to better understand what they do tell us
June 17, 2019

The P/E Ratio: A User’s Manual

Does a stock’s price and its P/E ratio tell you how much a company is worth? Conventional wisdom says yes, but we think otherwise. In this paper we explore:

  • The theory behind the discounted cash flow (DCF) valuation model and the underappreciated role that ROIC plays in the model
  • The P/E ratio and find that it does not tell us what most people think it does, nor does its offshoot, the P/E to growth (PEG) ratio
  • How we can use what we have learned about the DCF model to deconstruct P/E ratios in the real world to better understand what they do tell us

If there is a “small-cap effect” then why has the Russell 2000 underperformed the Russell 1000 over time?
January 18, 2019

The Size Paradox

If there is a “small-cap effect” then why has the Russell 2000 underperformed the Russell 1000 over time?

China’s mercantilist behavior, underscored by its “Made in China 2025 initiative,” is in conflict with U.S. demands for greater IP protection, a level playing field and improved market access. Left unresolved, free trade and globalization will be in retreat, with broad economic implications beginning with manufacturers.
December 10, 2018

Trump, Tech and Trade

China’s mercantilist behavior, underscored by its “Made in China 2025 initiative,” is in conflict with U.S. demands for greater IP protection, a level playing field and improved market access. Left unresolved, free trade and globalization will be in retreat, with broad economic implications beginning with manufacturers.

Three developments (the unwinding of QE, the soaring US budget deficit and the impending wall of maturities, especially of corporate bonds) will engender higher volatility and wider credit spreads. There is also a risk that interest rates will start rising for “bad” reasons (that is, an increase in fixed income supply). Each of these outcomes would be a headwind for high duration strategies.
July 2, 2018

The Return of Price Discovery

Three developments (the unwinding of QE, the soaring US budget deficit and the impending wall of maturities, especially of corporate bonds) will engender higher volatility and wider credit spreads. There is also a risk that interest rates will start rising for “bad” reasons (that is, an increase in fixed income supply). Each of these outcomes would be a headwind for high duration strategies.

Modern Portfolio Theory (MPT) dominates investment thinking today, but the pre-MPT view of the world still holds valuable insights. Our new white paper explores the limits of MPT in aiding successful investing.
April 13, 2018

The Limits of Theory

Modern Portfolio Theory (MPT) dominates investment thinking today, but the pre-MPT view of the world still holds valuable insights. Our new white paper explores the limits of MPT in aiding successful investing.